The pass-through entity (PTE) tax election allows PTEs, such as S corporations or partnerships, to elect to pay state income tax on their earnings on behalf of their partners or shareholders. On August 8, our Multistate PTE Taxes & Resident Credits webinar received positive engagement and interest. During and after the presentation, attendees submitted questions they had on PTE taxation. The time allotment of the webinar could not accommodate for providing answers to each question, so this post will identify and answer questions attendees asked pertaining to the PTE tax and its treatment.
Q: If an IL PTE pays quarterly estimated PTE tax payments and passes the credit through to their shareholders, what date are the taxes considered paid?
A: The PTE tax credit is treated by Illinois as having been paid and received on the last day of the PTE’s tax year.
Q: If an IL PTE overpays their PTE tax liability during the year through estimated payments, can the overpayment be passed through to the individual shareholders/partners for credit on their Illinois income tax returns?
A: No, the shareholders/partners of an Illinois PTE may only receive a credit for their share of the actual PTE tax. The PTE may request a refund of the overpayment.
Q: Does Illinois allow trusts to make a PTE tax election?
A: No, Illinois, and most states, allow only partnerships and S corporations to make the PTE tax election.
Q: Can you recommend a resource or article that summarizes PTE tax elections by state?
A: AICPA maintains and updates a chart that summarizes PTE tax information by state with links to legislation and authoritative guidance:
Q: Are there any suggestions on how to get Illinois to waive any penalties and interests on underpaid PTE payments?
A: IDOR released a bulletin announcing that they would abate the late payment penalties for 2022 4th quarter estimated tax payments due December 15, 2022, as long as the payments were made by January 17, 2023.
Q: Can you pay PTE taxes and get credit in Illinois, even if you did not elect by March 15th of 2023?
A: The estimated PTE tax payments are made during the year for which the PTE election is to be made. If a calendar-year PTE is making 2023 estimated PTE tax payments during 2023, they will make the election on their 2023 income tax return due March 15th, 2024.
Q: Because the election for the California PTE tax is irrevocable, does that mean the election is irrevocable for the year the election is made or does it apply for all future years?
A: The election for the California PTE tax is irrevocable, but the election is made on a per-year basis, meaning that the election is irrevocable only for the year in which the election is made.
Q: What are cash vs. accrual basis of accounting considerations regarding the PTE tax election?
A: For deductibility on a federal tax return, the timing of the payments may come into play depending on the basis of accounting that the PTE uses. Cash-basis taxpayers receive the deduction for the year in which the payments were made. Regarding estimated PTE tax payments, accrual-basis taxpayers generally receive the deduction in the year that the payments are made due to the economic performance test. However, there is a recurring item exception that accrual-basis taxpayers may use for recurring expenses that would allow the taxpayer to deduct the expense in the year for which the payment was for, but no authoritative guidance has been issued specifying whether such an exception could apply to estimated PTE tax payments.
Q: For the election to be made on a timely filed return, does that include extensions?
A: Specific-state guidance should be sought in order to ensure that a PTE election may be considered timely on an extended tax return. For example, Georgia specifically states that a PTE tax election must be made by the tax return’s due date or extended due date.
With the PTE tax election being relatively new and more states adopting it, authoritative guidance continues to be issued. Practitioners should continue to monitor this potential tax-saving strategy to determine whether it can benefit their clients with passthrough income.
By Chris Korban, CPA
Tax Materials Specialist, U of I Tax School
Publication 129 March 2022: Pass-through Entity Information
AICPA: Links to States’ Pass-Through Entity (PTE) Tax Legislation and Tax Authorities’ Information and Guidance
Department of Revenue, State of Georgia: HB 149 Pass-through Entity Tax FAQ